Business

4:28 pm

Tue August 13, 2013

DOJ Suit Seen Delaying, Not Killing Big Airline Merger

A United Airlines jet takes off behind a US Airways jet at Ronald Reagan Washington National Airport on Tuesday.

Win McNameeGetty Images

The government's decision Tuesday to oppose the merger of US Airways and American Airlines stunned airline analysts, but many predicted the deal eventually will win go through.

"Given that other airline mergers were approved, this was a surprise," University of Richmond transportation economist George Hoffer said. Other major carriers already have been allowed to combine forces, so "it's illogical to oppose this merger. This move comes a day late and a dollar short," he said.

The Justice Department lawsuit generally is being seen as a negotiating tactic rather than an effort to kill the $11 billion deal.

"The DOJ challenge could be a power play designed to force the airlines to give up routes, gates, and slots" to allow for more competition within the industry, George Hobica, founder of Airfarewatchdog.com, said in a written assessment.

The airlines suggest the suit will cause only a delay, not a derailment. In a letter to employees, American Chief Executive Tom Horton promised to vigorously defend the merger in a court process that "will likely take a few months."

The deal to create the country's largest airline was announced in February and appeared to be on track for a quick completion.

That's because in recent years, antitrust regulators have signed off on similar transactions. For example, the Obama administration approved the mega-mergers of United and Continental in 2010 and Southwest and AirTran Airways in 2011. The Bush administration approved Delta's merger with Northwest in 2008.

Given that US Airways already has made two round trips to bankruptcy court, and American has yet to emerge from bankruptcy, analysts assumed their combination would quickly win approval.

To supporters, the benefits were obvious: Blending American's parent company, Fort Worth, Texas-based AMR Corp., and Tempe, Ariz.-based US Airways Group Inc., would create a single, more stable carrier with a route network stretching across this country. And it would have deep reach into Latin America, Europe, Canada and the Caribbean.

The merged airline, operating under the name American, would carry more passengers than either United or Delta. That would attract more frequent fliers, while eliminating route redundancies to key airports such as New York's LaGuardia, Washington's Reagan National and Boston's Logan International.

But that's not the way antitrust enforcers saw it. The Justice Department was joined by attorneys general from Arizona, Florida, Pennsylvania, Tennessee, Texas and the District of Columbia.

"This transaction would result in consumers paying the price — in higher airfares, higher fees and fewer choices," said U.S. Attorney General Eric Holder in a statement.

William McGee, an aviation consultant for Consumers Union, said in a statement that "a combined American/US Airways could mean fewer flights and fewer choices for consumers, coupled with higher fares and lower quality of service."

American and US Airways dismiss such assessments, instead touting the advantages of having a seamless system of 6,700 daily flights headed to 56 countries.

"Blocking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices," the carriers said in a statement.

The companies noted that the other stakeholders — including creditors, bondholders and unions — are onboard with the merger.

"The widespread support from the employees and financial stakeholders of both airlines underscores the fact that this is the best path forward for both airlines and the customers and communities we serve," the statement said.

Industry analysts had predicted that the DOJ would not try to block the deal but rather insist the combined carrier surrender some airport slots to competitors, especially at Reagan Washington National Airport, where a merged American would be very dominant.

But many state officials had concerns about hubs. Here's why:

US Airways has hubs in Phoenix, Philadelphia and Charlotte, N.C. American has hubs in Dallas-Fort Worth, Chicago, Los Angeles, New York and Miami.

If the merged carrier were to have major operations in both Dallas and Los Angeles, then the Phoenix hub might lose importance. Also, Arizona would lose jobs and prestige as the combined company's headquarters moved away to Fort Worth. Arizona was one of the states that joined DOJ in the suit.

Pennsylvania also sued. Many analysts say the US Airways hub in Philadelphia would be redundant because a combined carrier would have a hub at JFK airport in New York.

Hub closures often do follow mergers. For example, American eliminated the hub in St. Louis after its 2001 purchase of Trans World Airlines. And Delta has dramatically cut service at its Cincinnati hub since its 2008 merger with Northwest Airlines.

In the airline industry, the rounds of mergers and bankruptcies have seemed endless since terrorists attacked in 2001. For the past dozen years, U.S. carriers have been filing for bankruptcy, grasping for merger partners, shrinking hubs, cutting employee ranks and imposing new fees to survive.

If the American merger goes through, the industry will have seen its 10 big carriers shrink to just four — American, United, Delta and Southwest — in a dozen years.